Can Spain and Italy Avoid Bailouts?

The Financial Times reports that European Union officials have started to work with Spain on a bailout and European Central Bank purchases of its bonds. The paper reports:

According to officials involved in the discussions, talks between the Spanish government and the European Commission are focusing on measures that would be demanded by international lenders as part of a new rescue programme, ensuring they are in place before a bailout is formally requested.

Based on Bloomberg reports, no such thing is true:

Italy and Spain won’t request bailouts unless a new surge in bond yields leaves them shut out of markets as no government will voluntarily accept conditions imposed for the aid, a senior Italian government official said.

Obviously, both assessments cannot be correct, but the reasons Spain and Italy will or will not seek bailouts have only slightly to do with bond yields. Contraction in gross domestic product, employment and manufacturing probably will overwhelm their abilities to prove they can remain economically viable on their own. Yields will only be an indirect judgment about that.

The Markit Eurozone flash PMI showed that all of the nations in the region save Germany and France continue to stagger. EuroStat data showed that, in July, Spain’s unemployment rose to 21.5%, compared to 21.7% in the same quarter a year ago. In Italy, the figure was 10.7% in July. Italy’s debt problems may nearly match Spain’s, but its economy is somewhat more robust.

As EU leaders attempt to frame their problems based on bond yields and the extent to which the possibility of ECB intervention has brought them down, they have skirted the issue of the deep recession that has gripped their nations. Looking at it through the economic lens, they cannot survive without aid. That puts the politicians in these countries in the unenviable position where they will tell the world and their citizens one thing about their strengths and do another because of their weaknesses. The recession makes that only a matter of time.

Douglas A. McIntyre